Student Question
“Please help me understand the answer with a solution before the journal entry.”
– Marco
MCQ
Madison Corporation uses the allowance method to value its accounts receivable and is making the annual adjustments at fiscal year end, November 30. The proportion of uncollectible accounts is estimated based on past experience, which indicates 1.5% of net credit sales will be uncollectible.
Listed below are Madison’s account balances at November 30 prior to any adjustments and the $10,000 write-off.
| Sales | |
| Accounts receivable | 750,000 |
| Sales discounts | -125,000 |
| Allowance for doubtful accounts | -16,500 |
| Sales returns and allowances | -175,000 |
| Bad debt expense | 0 |
After a suggestion from the company’s external auditors, Madison wishes to value its accounts receivable using the balance sheet approach instead.
The chart below presents the aging of the accounts receivable subsidiary ledger accounts at November 30, not including the account to be written off.
| Due <60 | days 61-90 | days 91-120 | days >120 | Total |
| $390,000 | $115,000 | $210,000 | $25,000 | 740,000 |
| 1% | 5% | 15% | 40% | % Uncollectible |
The final entry to the related accounts is:
A. Credit allowance for doubtful accounts for $44,650 and debit bad debt expense for $44,650. (Correct Answer)
B. Debit allowance for doubtful accounts for $44,650 and credit bad debt expense for $44,650.
C. Debit allowance for doubtful accounts for $34,650 and credit sales for $34,650.
D. Credit accounts receivable for $34,650 and debit bad debt expense for $34,650.
1-on-1 CMA Coaching Support
LOS: Identify how various financial transactions affect the elements of each of the financial statements and determine the proper classification of the transaction.
COMPUTATION AND DISCUSSION:
The problem is basically requiring us to find the adjusting entry for the allowance for doubtful accounts (expense to be recognized). The problem states that it wishes to value its accounts receivable approach.
This means that the accounts receivable (a balance sheet account) will be the basis of the estimate of the allowance for doubtful accounts.
We will use the following formula in computing the expense to be recognized by squeezing it out:
| Allowance for Doubtful Accounts Beginning | xxx | ||
| Add: Expense Recognized for the Period (Bad Debt Expense for the Period) | xxx | ||
| Less: Accounts Written Off | (xxx) | ||
| Allowance for Doubtful Accounts, Ending (Required Balance) | xxx | ||
Replacing all with the given,
| Allowance for Doubtful Accounts Beginning | 16500 | |||
| Add: Expense Recognized for the Period (Bad Debt Expense for the Period) | ??? | |||
| Less: Accounts Written Off | 10,000 | |||
| Allowance for Doubtful Accounts, Ending (Required Balance) | xxx | This is to be computed using the aging of AR |
||
Let us now compute the required balance of allowance for doubtful accounts using the accounts receivable as a basis (balance sheet approach):
| ($390,000 x 1%) | 3,900 | ||
| ($115,000 x 5%) | 5,750 | ||
| ($210,000 x 15%) | 31,500 | ||
| ($25,000 x 40%) | 10,000 | ||
| Allowance for Doubtful Accounts, Ending (Required Balance) | 51,150 | ||
Therefore, we can now squeeze out the equation to get the expense adjustment:
| Allowance for Doubtful Accounts, Ending (Required Balance) | 51,150 | ||
| Add: Accounts Written Off | 10,000 | ||
| Less: Allowance for Doubtful Accounts Beginning | 16,500 | ||
| Expense Recognized for the Period (Bad Debt Expense for the Period) | 44,650 | ||
The entry to record the adjustment will be:
| DEBIT | CREDIT | |||
| Bad Debt Expense | 44,650 | |||
| Allowance for Doubtful Accounts | 44,650 | |||
Exam Secrets Cheat Sheet
No worries, your information is safe with me. I hate spam too!
My Complete Course students pass the CMA exam at double the global CMA pass rate of 35%. This is possible due to the personalized 1-on-1 coaching support they receive throughout their exam prep program.
Marco didn’t have any study materials before finding CMA Exam Academy so he opted for my Complete Course to gain access to the ultimate toolkit for the CMA exam preparation.
Until our next lesson,
Hi, I’m Nathan Liao (aka the CMA Coach)! For the last 10 years, over 82,000 accounting and finance pros came knocking at my door seeking guidance and help. If you’re also aiming to conquer the CMA exam on your very first try—without wasting away time or money—you’ve found your ultimate guide. Dive in deeper to discover more about me and the dedicated team that powers CMA Exam Academy. Click here and let’s embark on this journey together!
